Stock pick: Magellan

An out-there e-commerce company has become critical to China’s digital transformation.

Top this. Alibaba (NYSE: BABA) co-founder Jack Ma wore oversized purple-tinged glasses, a studded leather jacket with chains and a braided long-haired wig and sang Chinese pop songs accompanied by two other co-founders to farewell staff at the e-commerce giant’s 20th birthday last year.

The company that earned USD 56 billion in revenue in fiscal 2019 had much to celebrate. BABA is China’s leading e-commerce marketplace operator and it has used these profits to expand into other high-growth industries. These include cloud computing, payments and digital finance, digital advertising, international e-commerce, online food delivery, grocery, logistics and digital media and entertainment. These businesses helped BABA notch revenue growth of 48% p.a. over the past five years.

BABA is well placed to record impressive earnings growth in coming years. The company is positioned to benefit from growing consumer spending and rising online penetration while network effects, user data insights, economies of scale and an ability to outspend competitors are sealing market supremacy across e-commerce segments. All up, BABA’s wide reach presents as a unique opportunity to benefit from China’s digital transformation and shift to a consumption economy.

BABA comes with risks, to be clear. One that is common to Chinese stocks is that foreign investors can gain exposure to BABA only by investing in ‘variable interest entity’ structures where they don’t own shares in the operating companies directly. Another risk is that BABA competes for the attention and business of Chinese consumers in a dynamic market against the formidable Tencent (HKG: 0700), JD.com (NASDAQ: JD) and Meituan-Dianping (HKG: 3690). Notwithstanding the intense competition, BABA is likely to deliver the earnings growth in coming years that justify these risks and lead to even more bizarre birthday parties.

This information has been prepared and provided by Magellan. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.